Will water slake a thirst for profits?

For investors who wish their capital could be tackling important global problems while generating handsome returns, water looks quite refreshing.

That's because experts say the stage is set for water-related goods and services to experience strong demand in coming years. In the United States, aging systems for delivering drinking water will require $250 billion to maintain and upgrade over the next 30 years, according to the American Water Works Association, a water utility association in Denver. Worldwide, more than 1.1 billion people lack safe drinking water, according to the United Nations, and needs are sure to increase with a global population on course to reach 8 billion by 2025.

"With climate change issues, and water becoming more scarce in certain areas, [water] is something that all of a sudden is going to be the big issue," says Susan Davis, national water strategist for CARE International, an Atlanta-based nonprofit with water projects in about 45 countries. "And we're going to be caught with our pants down because we haven't really valued it appropriately."

Ethically minded in­­­vestors have reason to like this sector, observers say, both for its humanitarian virtue – its core product is essential – and its rosy growth prospects. But winning at the water game, both in terms of profits and clean conscience, isn't necessarily as simple as buying into a water-focused mutual fund.

For starters, water-focused funds are hard to find. The Sustainable Water Fund from Zurich-based Sustainable Asset Management posted returns in excess of 20 percent in 2005 and 2006, but it's accessible only to investors from certain European countries. American investors seeking water exposure need either to pick from a vast array of water-related stocks or delve into specialized exchange-traded funds (ETFs), which bundle stocks together and then trade like stocks as a single unit on an exchange.

Last month, two new water-resources ETFs made their debut: the Claymore S&P Global Water Index Fund, which takes an international approach, and the First Trust ISE Water Index Fund, which focuses on potable and wastewater industries. Another water-related ETF, PowerShares Water Resources Portfolio, in which 80 percent of the listed companies rank either as utilities or industrials, has the longest track record. It has climbed 17.5 percent since its December 2005 inception.

Ethical investors also need to know more than who's best positioned to turn steady growth into capital returns. They must also weigh the pros and cons of commodifying, and occasionally raising prices for, an essential resource.

Worried about an international trend toward privatizing water-delivery systems, some Christian groups have made a point in recent years to identify water as a public good and a basic human right. At an April conference on "Earth's Water Crisis" at Virginia Theological Seminary in Alexandria, former Episcopal Church Presiding Bishop Frank Griswold defied those angling to profit from water distribution. He championed a view of "water not as a possession, a commodity, a source of economic advantage for some at the expense of others but a gift, an outpouring of divine love."

Some take aim at bottled water

Activists, such as those at Ottawa's Polaris Institute and Boston's Corporate Accountability International, argue it's wrong for large corporations to take control of the general public's water supplies. Polaris this month kicked off what it calls an exposé of the $11 billion bottled-water industry, which the group takes to task for packaging what it calls a "free" resource and depleting underground aquifers, even in such semi-arid places as drought-ravaged Australia. Its chief targets are beverage giants Coca-Cola, PepsiCo, Nestlé, and Danone.

For its part, the International Bottled Water Association contends that bottling accounts for only 0.02 percent of groundwater withdrawals in the United States. "Groundwater supplies are continuously 'recharged' or replenished by precipitation, thus they are considered 'renewable,' " the association said in a November 2006 position statement. Critics' "narrow focus on the bottled-water industry does nothing to protect and sustain groundwater [because] bottled water is one of thousands of products to use water as an ingredient or in production."

Activists also worry about contracts awarded to private firms to operate municipal water systems. They've taken aim at two French water giants, Suez and Veolia Environnement, for alle­gedly taking over local systems and then raising prices, failing to reinvest, or both.

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